Reference no: EM132678105
Problem - WorldCom, Inc. improperly capitalized $3.8 billion dollars of expense from January 1, 2001, through the first quarter of 2002 ($3.04 billion occurred in 2001). Its balance sheets for the years ending December 31, 2000 and 2001 showed the following selected balances (in millions):
|
|
2000
|
2001
|
Change
|
|
Other current assets
|
$2,007
|
$2,230
|
$223
|
|
Accounts receivable (net of allowance for bad debts of $1,532 in 2000 and $1,086 in 2001)
|
6,815
|
5,308
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(1,507)
|
|
Accounts payable
|
6,022
|
4,844
|
(1,178)
|
|
Other current liabilities
|
4,005
|
3,576
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(429)
|
On the SCFs (indirect method) for the year ended December 31, 2001, WorldCom showed the following adjustments to reconcile net income to cash flow from operations (I = increase to income and D = decrease to income):
Accounts receivable (net) $281 (I)
Other current assets 164 (I)
Accounts payable and other current liabilities 1,154 (D)
Required -
a. What effect did WorldCom's misclassification have on cash flows (a) in total and (b) by classification?
b. Why is it difficult to accept the effects on cash flow from operations of the working capital items listed above?
c. WorldCom's long-term debt went up by approximately $13 billion during 2001. Is it possible that some of WorldCom's current liabilities were reclassified as long-term during 2001?